Newton’s third law for BI cover

The massive sums paid by insurers and their reinsurance partners to honour non-physical damage business interruption (BI) claims stemming from lockdown and pandemic are beginning to take their toll.

One after the other, traditional insurers are reviewing their BI exposures and making significant changes to their policy wordings insofar future non-physical damage BI cover. You could even make the tongue-in-cheek observation that Newton’s third law (for every action, there is an equal and opposite reaction) is applicable to the insurance industry too. 

Focusing on exposure management

The reasoning here, is that paying out billions of rand in BI and contingent BI claims (the action) has forced insurers and their reinsurance partners to retain a larger slice of future premiums by limiting their exposures under these sections (the equal and opposite reaction). In its Integrated Report 2021, Santam observed that it had “focused on exposure management and reviewed and amended wording for a number of policies” in response to its pandemic-related CBI claims experience, as well as to compensate for increased risks from climate change. The insurer, which had paid R3.2 billion in gross CBI claims to policyholders up to 31 December 2021, was among the first to remove CBI cover relating to infectious diseases for new claims or lockdowns after 1 June 2020. 

The evolving risk landscape is forcing South African insurers to make further curtailments to the level of cover available under the broad BI heading. In mid-March 2022, Santam issued an operational circular that altered how it would settle certain types of non-physical damage losses. The change applied specifically to extended BI cover for losses emanating from public utilities and public telecommunications providers, and is the latest attempt to create certainty in the previously poorly-defined non-physical damage space. The removal of these extensions will be phased in over time. The insurer writes: 

On defined events and extended cover

“Defined events are perils such as fire, lightning, explosion and malicious damage, and special perils such as storm. These perils are usually found in the material damage sections [of a policy] such as the fire, buildings combined and office contents sections. Extended cover, as seen in public utilities: extended cover and public telecommunication: extended cover provides for perils much wider than the defined events mentioned above. They offer cover for failure or partial failure, which incorporates cover that has a very wide range of possibilities and levels of additional risk for insurers and reinsurers. 

“Although this cover has been in existence for many years, there are increasing concerns that power supply and various associated utilities could fail, resulting in large scale losses. With these concerns in mind, reinsurers have withdrawn their support for BI covers that provide for non-damage or non-physical damage extensions, such as the extended covers referred to in this circular. This systemic risk could have a catastrophic impact on the entire industry without reinsurer support, so providing this cover would be unsustainable”. 

This development should hardly come as a surprise given the ongoing decay of municipal infrastructure and Eskom’s promise of at least 37 days of load shedding this winter. 

Know thy policy wordings

Paul Kruger, writing for Moonstone Information Refinery, observed that “these changes affect all products that have a BI section, including policies issued by Santam and broker or administrator-issued policies”. He added that the impact on Santam’s various contractual wordings is dependent on how such wordings are arranged or constructed and that since most wordings are similar for these extensions, removing them from the contract is fairly simple. Brokers were urged to contact their relationship manager or Santam’s commercial contact centre for any queries about the circular. 

At the time, Kruger suggested that other insurers would take similar steps, and it did not take long for his premonition to play out. Old Mutual Insure has also announced it will exclude certain types of non-physical damage from its BI cover due to difficulties in reinsuring the risk. In a circular dated 7 April 2022, the insurer wrote: 

“In view of the lack of support from our reinsurers in the event of a large scale event, we regret to advise that, after careful consideration of our overall exposure, we will no longer be able to provide non-physical damage BI cover. This means that we will [only] provide cover for BI losses that are due to physical damage to insured property. Consequently, we will not cover losses arising from non-physical damage acts, such as closure or restriction by a lawfully established or recognised authority. Some of the extensions that are impacted include public utilities and public telecommunications”. The changes apply immediately to new business and to policy renewals from 1 August 2022. 

The insurer also said it was also replacing its computer exclusion with an exclusion on all cyber-related losses! This is a development that brokers will have to pay close attention to given that cyber risks feature high up on most industry risk rankings. 

Cover for insured perils only

According to Mark Bechard, also writing for Moonstone: “From August, [Old Mutual Insure] policies with public utilities extended cover and public telecommunications extended cover will have these extensions replaced with public utilities insured perils only and public telecommunications insured perils only”. 

As we browsed the aforementioned insurer communications we could not help but feel for South Africa’s commercial insurance brokers, who must now navigate the already complex cover landscape cognisant of a range of additional cover restrictions, while keeping track of when these changes take effect. Broker beware: because the failure to advise your client about these changes (the action) could result in a massive claim rejection plus, potentially, a costly trip to the FAIS Ombud (the equal and opposite reaction). 

Writer’s thoughts:
The introduction of policy exclusions with future-dated implementation can result in confusion over which of your clients are subject to which version of an insurer’s policy wording. It surely also raises the potential for mistakenly thinking that a certain level of cover applies, when it has actually been withdrawn. Are you confident that your clients are fully informed of the exclusions and limits in force on the business interruption sections of their commercial insurance policies? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.